“Banks lend by creating credit. They create the means of payment out of nothing.”
(HAWTREY, M. Ralph), Former Secretary of the British Treasury
That’s not all. Banks create only the amount of the Principal. They don’t create the money to pay the Interest. Where is that supposed to come from?
The only place borrowers can go to obtain the money to pay interest is the general economy’s overall money supply. Almost all that overall money supply has been created exactly the same way, as bank credit that has to be paid back with more than was created!
So everywhere, there are other borrowers in the same situation, frantically trying to obtain the money they need to pay back both Principal and Interest from a total money pool, which contains only Principal.
It’s clearly impossible for everyone to pay back the Principal plus the Interest unless every penny of interest the lenders take in is recycled back to those who need this money to make their payments.
This means interest earnings must be 100% spent so that borrowers can earn these dollars repeatedly. While much is spent as interest to depositors, operating expenses and dividends, some of the interest income becomes new loans at interest, or investments, creating additional demand for money and an ultimate shortage of debt-free money available for borrowers to earn.
To maintain a functional society, the rate of foreclosure needs to be low. So, to accomplish this, more and more new debt money has to be created to satisfy today’s demands for money to service the previous debt. Of course, this just makes the total debt bigger, and that means more interest must ultimately be paid, resulting in an ever-escalating and inescapable spiral of mounting indebtedness.
It is only the time lag between money’s creation as new loans, and its repayment that keeps the overall shortage of money from catching up and bankrupting the entire system. However, as the banks’ insatiable credit monster gets bigger and bigger, the need to create more and more debt money to feed it becomes increasingly urgent.
“If two parties, instead of being a bank and an individual, were an individual and an individual, they could not inflate the circulating medium by a loan transaction, for the simple reason that the lender could not lend what he didn’t have, as banks can do. Only commercial banks and trust companies can lend money that they manufacture by lending it.”
(FISHER, Irving, 1935), Economist